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The Tax Exempt and Government Entities (TE/GE) division of the IRS recently issued its FY 2018 Work Plan, which builds upon the agency’s ongoing mission to refine, realign and improve their education and examination methods. In 2017, the agency implemented data analytics and knowledge management strategies to target organizations with a high likelihood of noncompliance, and the 2018 plan continues this practice. Facing budget cuts and a declining workforce, the agency reiterated its mission, first stated in last year’s work plan, of transparency, efficiency and effectiveness.

For nonprofits preparing for 2018 now is the ideal time to review the work plan and develop a plan in the case of an IRS audit.

Fiscal Year 2018 Initiatives 
For fiscal year 2018, the IRS has outlined the following compliance strategies:

• Examine entities that state they are supporting organizations and filed the Form 990-N
• Examine organizations that have operated as for-profit entities in the past, but now operate as 501 (c)(3) organizations
• Examine organizations that show signs of providing private benefit or inurement to individuals or private entities though contracts with individuals or other arrangements such as partnership agreements

If any of these attributes apply to your organization, it is crucial to ensure your financial information is organized and correct, to prepare for the possibility of an audit.

Tax Gap Issues in the Spotlight
In 2016 and 2017, the agency identified the tax gap as a key issue area. In 2016, the IRS conducted almost 5,000 examinations, with a large portion of these examinations encompassing tax gap issues, such as employment tax and unrelated business income tax. For 2018, these tax areas remain an area of concern. Organizations should be aware of the following:

• Unrelated Business Income: Organizations should review materials as they relate to gaming, non-member income, expense allocations, net operating losses, rental activity, advertising, debt financed property rentals and investment income.
• Employment Tax Issues: Including unreported compensation, accountable plans, worker reclassifications, noncompliance with FICA, FUTA and backup withholding requirements. In recent years, the agency has demonstrated their seriousness in pursuing these issues and leveraged the knowledge and expertise of specialists from the Federal State and Local government function. This partnership improved their ability to detect and resolve employment tax issues. As part of the FY 2018 plan, the employment tax specialists will now work as part of the same unit as the exempt organization specialists.

Due to the prevalence of tax gap issues, the agency plans to release an issue snapshot addressing the unrelated business income tax. A knowledge management product on employment tax issues is also planned to be released to help both IRS examiner and organizations get up to speed on these key issues.

Filing a form incorrectly, or making a reporting error, will not necessarily result in an audit or examination. The agency will continue to use compliance checks to determine whether an organization is keeping proper records and reporting the required information. Compliance checks allow an organization to revise filed information and tax returns, but they are not an examination or audit. With the tax gap being a major issue for many nonprofits, the first step in resolving many tax gap problems will be a compliance check.

Data and Guidance Initiatives
In May 2017, TE/GE brought online a Compliance Planning & Classification unit, streamlining processes and providing a comprehensive approach to identify and monitor compliance risks using data analytics. The agency will continue to implement data gathered from form 990, 990-EZ and 990-PF. Utilizing data analytics for increased efficiency will continue, as in FY 2018, the agency will launch a Compliance Strategy Tool and an Internal Submission Portal. These tools will facilitate crowdsourcing on areas of non-compliance. With a data-driven approach, agents will become faster and more efficient in their auditing process.

The IRS has focused on providing online guidance and knowledge materials with the expectation that this will improve compliance and increase the number of correctly submitted documents. Not only will this guidance aid organizations in the proper process for exemption filing, but it will also act as a training resource for agents, allowing for the quick resolution of issues.

Best Practices for Organizations
With the IRS work plan released, organizations can start preparing for the year ahead. If there are any uncertain tax positions, it is best to sort them out sooner rather than later. Preparation is key.

After analyzing what to expect for the coming year and identifying any potential issues, organizations should ensure they have properly documented all financial activity. A routine audit means 3-years of documentation will be examined. However, in certain circumstances, documents from years prior may be requested. For example, if an organization is offsetting current income with a loss generated two decades ago, the IRS can request information from the year of the loss. In the event your organization must challenge an IRS outcome, documentation will be crucial. Without proper documentation, it will be difficult to make a strong case.

If you need help with the application, understanding, or have further questions regarding this standard, please call 404-231-2001, ask for Nathan, or email nathan@marshalljones.com

After the Equifax data breach, year-end tax planning may be even more important. Social Security numbers were among the data exposed in the Equifax hack, which affects up to 143 million people. Immediate to-dos have focused on fraud alerts, credit freezes and monitoring to curtail thieves’ ability to open new accounts in victims’ names. But experts say consumers should also start thinking ahead to tax season — when criminals could potentially use those stolen Social Security numbers to file fraudulent tax returns and snare refunds. It’s still unclear what impact the Equifax breach could have on the 2018 filing season.

So, what can you do? First, some unwelcomed news. IRS protections currently in place — filing an identity-theft affidavit or obtaining a filing PIN (more on that, below) — are specifically for victims of tax-related identity theft. Having your Social Security number exposed in a data breach isn’t enough. As the IRS notes in its taxpayer resource, “not every data breach results in identity theft, and not every identity theft is tax-related identity theft.” But there are still some steps you can take to mitigate the risks ahead of tax time:

Prepare to file early

‘File early’ doesn’t mean rush to file and risk underreporting income or having to file an amended return later. Now, we’re aware that not everyone can file early, if you’re waiting on 1099s for dividends and interest they may not show up until mid-February and taxpayers with partnership income with K-1’s may still be waiting until later in the season. However, you do have the ability to prep and to be organized.

• Review your most recent tax return. That can provide a good framework for this year, in terms of deductible expenses to tally and official documents (W-2s, 1099s, etc.) to expect, Gagnon said. Note any changes, say, if you switched jobs, or opened a new investment account.
• Make a list of key documents you’ll need, so you can check them off as they arrive and see at a glance what you are still waiting on. (See common deadlines, below.) Be proactive about calling or emailing to track down a late document, he said.
• If you have moved this year, reach out to any of the employers, financial institutions and other entities sending you key forms, to make sure they have your current mailing address and contact information, he said.
• Start gathering receipts and records for potentially deductible expenses, like charitable donations or business expenses.
• Monitor online accounts. Some entities only make tax documents available online, rather than mailing a copy; others offer online access well before they send paper copies in the mail.

Monitor your tax record

The IRS offers online access that lets taxpayers see details of their tax account. It can be an effective way to monitor your account, if you’re concerned. You would be able to see if someone files a return in your name and act quickly. Signing up for this account can be difficult as the IRS requires an immense amount of personal information to gain the online access.

Consider a PIN

The IRS does offer so-called identity protecting PINs, or IP PINs, to prevent someone from filing a fraudulent return with your Social Security number. Participants get a new six-digit number each year, without which your e-filed return will be rejected and a paper return, significantly delayed.

Currently, IRS guidelines only allow you to get an IP PIN if you filed last year’s return with a home address in Florida, Georgia or Washington, D.C., where the government is running a pilot program. PIN protection isn’t foolproof, the IRS PIN system has been subject to cyberattacks as well. Earlier this year, the Treasury inspector general for tax administration released a report noting inconsistencies in IRS processes that left some victims without PINs.

Watch for fraud flags

Fraudulent tax returns aren’t the only tax-time identity theft issue to keep an eye on. The IRS warns that receiving certain tax documents or IRS notices — like a CP2000 to verify unreported income or a 1099 from an employer you haven’t worked for — can be a red flag for employment-related identity theft.